HOUSE OF LORDS

OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT

IN THE CAUSE

[2004] UKHL 36

1. I have had the advantage of reading in draft the speech of my noble and learned friend Lord Steyn. For the reasons he gives, with which I agree, I would allow this appeal.

LORD STEYN

My Lords,

2. This appeal raises an important point on the proper construction of section 123(1) of the Employment Rights Act 1996. Section 123 provides for the making of a compensatory award for unfair dismissal. It reads, so far as it is material, as follows:

"(1) Subject to the provisions of this section and sections 124 [,126, 127 and 127A(1), (3) and (4)], the amount of the compensatory award shall be such amount as the tribunal considers just and equitable in all the circumstances having regard to the loss sustained by the complainant in consequence of the dismissal in so far as that loss is attributable to action taken by the employer.

(2) The loss referred to in subsection (1) shall be taken to include -

(a) any expenses reasonably incurred by the complainant in consequence of the dismissal, and

(b) subject to subsection (3), loss of any benefit which he might reasonably be expected to have had but for the dismissal.

(3) The loss referred to in subsection (1) shall be taken to include in respect of any loss of -

(a) any entitlement or potential entitlement to a payment on account of dismissal by reason of redundancy (whether in pursuance of Part XI or otherwise), or

(b) any expectation of such a payment,

only the loss referable to the amount (if any) by which the amount of that payment would have exceeded the amount of a basic award (apart from any reduction under section 122) in respect of the same dismissal."

Omitting the opening words of qualification in section 123(1), which are not directly relevant, the question is whether this provision allows compensation to be awarded for non-economic damage. An employee, who claims to have suffered humiliation, injury to feelings and distress, as a result of a constructive dismissal, argues that properly construed section 123(1) allows for the recovery of non-pecuniary heads of loss. The employer argues that section 123(1) only permits recovery of pecuniary loss. This is the central dispute of statutory construction before the House.

3. The ultimate genesis of section 123(1) of the 1996 Act was section 116(1) of the Industrial Relations Act 1971. For present purposes the re-enactment of section 116 by Schedule 1, para 19, of the Trade Union and Labour Relations Act 1974, by section 76 of the Employment Protection Act 1975 and by section 74 of the Employment Protection (Consolidation) Act 1978 are not material. Section 116(1) of the 1971 Act provided:

". . . the amount of the compensation shall . . . be such amount as the Court or tribunal considers just and equitable in all the circumstances, having regard to the loss sustained by the aggrieved party in consequence of the matters to which the complaint relates, in so far as that loss was attributable to action taken by or on behalf of the party in default."

The differences in wording between section 116(1) of the 1971 Act and section 123(1) of the 1996 Act do not affect the issue before the House. The statutory formula for the making of a compensatory award remained exactly the same.

4. In Norton Tool Co. Ltd v Tewson [1972] ICR 501 the question arose whether under section 116(1) compensation could be awarded for injury to feelings. The point was directly in issue in the proceedings and the court heard contrary arguments on it. Sitting as president of the National Industrial Relations Court Sir John Donaldson ruled (504D-505A):

"In our judgment, the common law rules and authorities on wrongful dismissal are irrelevant. That cause of action is quite unaffected by the Industrial Relations Act 1971 which has created an entirely new cause of action, namely, the 'unfair industrial practice' of unfair dismissal. The measure of compensation for that statutory wrong is itself the creature of statute and is to be found in the Act of 1971 and nowhere else. But we do not consider that Parliament intended the court or tribunal to dispense compensation arbitrarily. On the other hand, the amount has a discretionary element and is not to be assessed by adopting the approach of a conscientious and skilled cost accountant or actuary. Nevertheless, that discretion is to be exercised judicially and upon the basis of principle.

The court or tribunal is enjoined to assess compensation in an amount which is just and equitable in all the circumstances, and there is neither justice nor equity in a failure to act in accordance with principle. The principles to be adopted emerge from section 116 of the Act of 1971. First, the object is to compensate, and compensate fully, but not to award a bonus, save possibly in the special case of a refusal by an employer to make an offer of employment in accordance with the recommendation of the court or a tribunal. Secondly, the amount to be awarded is that which is just and equitable in all the circumstances, having regard to the loss sustained by the complainant. 'Loss' in the context of section 116 does not include injury to pride or feelings. In its natural meaning the word is not to be so construed, and that this meaning is intended seems to us to be clear from the elaboration contained in section 116(2). The discretionary element is introduced by the words 'having regard to the loss.' This does not mean that the court or tribunal can have regard to other matters, but rather that the amount of the compensation is not precisely and arithmetically related to the proved loss. Such a provision will be seen to be natural and possibly essential, when it is remembered that the claims with which the court and tribunals are concerned are more often than not presented by claimants in person and in conditions of informality. It is not, therefore, to be expected that precise and detailed proof of every item of loss will be presented, although, after making due allowance for the skills of the persons presenting the claims, the statutory requirement for informality of procedure and the undesirability of burdening the parties with the expense of adducing evidence of an elaboration which is disproportionate to the sums in issue, the burden of proof lies squarely upon the complainant.

(Emphasis supplied)

There was no appeal. The decision in Norton Tool was generally assumed to reflect the correct legal position until it was called into question in the judgment of Lord Hoffmann in Johnson v Unisys Ltd [2003] 1 AC 518.

5. While there may arguably be differences of opinion about the exact ratio decidendi of Johnson v Unisys, I am content to accept that the central legal decision of the majority (Lord Bingham of Cornhill, Lord Nicholls of Birkenhead, Lord Hoffmann and Lord Millett) was as summarised in the headnote of the Appeal Cases report. It reads as follows (518H-519A):

". . . under Part X of the Employment Rights Act 1996

Parliament had provided the employee with a limited remedy for the conduct of which he complained; that, although it was possible to conceive of an implied term which the common law could develop to allow an employee to recover damages for loss arising from the manner of his dismissal, it would be an improper exercise of the judicial function for the House to take such a step in the light of the evident intention of Parliament that such claims should be heard by specialist tribunals and the remedy restricted in application and extent;"

This is the context in which Lord Hoffmann, who gave the leading opinion, commented on the meaning of section 123 of the 1996 Act. He said that Parliament adopted "the practical solution of giving the tribunals a very broad jurisdiction to award what they considered just and equitable but subject to a limit on the amount": para 54. He continued:

"55. In my opinion, all the matters of which Mr Johnson complains in these proceedings were within the jurisdiction of the industrial tribunal. His most substantial complaint is of financial loss flowing from his psychiatric injury which he says was a consequence of the unfair manner of his dismissal. Such loss is a consequence of the dismissal which may form the subject matter of a compensatory award. The only doubtful question is whether it would have been open to the tribunal to include a sum by way of compensation for his distress, damage to family life and similar matters. As the award, even reduced by 25%, exceeded the statutory maximum and had to be reduced to £11,000, the point would have been academic. But perhaps I may be allowed a comment all the same. I know that in the early days of the National Industrial Relations Court it was laid down that only financial loss could be compensated: see Norton Tool Co Ltd v Tewson [1973] 1 WLR 45; Wellman Alloys Ltd v Russell [1973] ICR 616. It was said that the word 'loss' can only mean financial loss. But I think that is too narrow a construction. The emphasis is upon the tribunal awarding such compensation as it thinks just and equitable. So I see no reason why in an appropriate case it should not include compensation for distress, humiliation, damage to reputation in the community or to family life.

56. Part X of the Employment Rights Act 1996 therefore gives a remedy for exactly the conduct of which Mr Johnson complains. But Parliament had restricted that remedy to a maximum of £11,000, whereas Mr Johnson wants to claim a good deal more. The question is whether the courts should develop the common law to give a parallel remedy which is not subject to any such limit."

In practice this observation was regarded as the green light to make claims for non-pecuniary loss in tribunals. It was the foundation of Mr Dunnachie's claim.

6. In 1986, at the age of 19, Mr Dunnachie began to work for the Kingston upon Hull City Council. In 1988 he qualified as an environmental health officer. In January 1995 he was appointed as senior environmental health officer. In March 2000 he was appointed as acting principal health officer in the commercial department of the food section. On 8 March 2001 Mr Dunnachie resigned on notice with effect from 9 April 2001. He alleged that he was constructively dismissed. On 29 June 2001 he commenced proceedings in an employment tribunal. Between 22 and 26 April 2002 his claims were heard. On 15 May 2002 the tribunal held that he had been unfairly dismissed and also awarded him the sum of £438.46 in respect of an unlawful deduction of wages. The tribunal stated (para 50):

". . . we found that Mr Kitching [the colleague and sometime line manager of Mr Dunnachie] did, for whatever reason, have a low opinion of the applicant's capabilities. That opinion was misplaced. Nevertheless, he acted upon it by seeking to undermine the applicant whenever the opportunity presented itself. A particularly bad example was his irrational refusal to allow the prosecution of Skelton's Bakery to proceed. When the applicant challenged that decision by going to their manager, Mrs Cottis, we are satisfied that Mr Kitching retaliated by conducting an in-depth investigation into the management of the applicant's files, without telling him that he was doing so. He then threatened the applicant with disciplinary proceedings and left the matter hanging in the air. Mr Kitching's conduct was compounded by that of Mrs Cottis, who failed to alleviate the applicant's anxieties about the prospect of being suspended. Both she and Mr Duxbury [her immediate superior] either failed or refused to recognise that the applicant had been a victim of bullying by Mr Kitching. Mr Duxbury deliberately sought to deflect the applicant from making a formal complaint under the respondent's personal harassment policy. The respondent's treatment of the applicant by those officers caused his ill-health. We are satisfied that there was the clearest evidence of a breach of the implied term of mutual trust and confidence."

On 24 May a remedies hearing followed. Mr Dunnachie put forward a claim for humiliation and injury to feelings over several months before his departure. Relying expressly on Lord Hoffmann's observations in Johnson v Unisys, the tribunal held that Mr Dunnachie had suffered losses of £123,328.28, including £10,000 for injury to feelings. After applying the statutory cap to the compensatory award, it ordered the employer to pay compensation in the sum of £51,700 (being the statutory maximum at the time of dismissal) and costs in the sum of £2,752. In addition, there was a basic award of £3,240.

7. The employer appealed to the Employment Appeal Tribunal. The appeal was heard together with two others which also raised the issue whether compensation for injury to feelings may be recovered under section 123(1). The EAT allowed the appeal. Giving the judgment of the EAT, the president, Burton J, concluded that the views expressed by Lord Hoffmann at para 55 of his opinion in Johnson v Unisys were obiter and that on a correct construction of section 123 of the 1996 Act it did not allow recovery for non-economic loss: Dunnachie v Kingston upon Hull City Council [2003] ICR 1294. The EAT granted leave to appeal to the Court of Appeal. The other two appeals were settled before the hearing of the appeal in the Court of Appeal.

8. The appeal to the Court of Appeal was only against the award for injury to feelings. The Court of Appeal allowed the employee's appeal: Dunnachie v Kingston upon Hull City Council [2004] IRLR 287. By a majority it was held that the remarks of Lord Hoffmann at para 55 in Johnson v Unisys were obiter (per Brooke LJ and Evans-Lombe J; Sedley LJ dissenting). By a different majority the Court of Appeal decided that section 123(1) of the 1996 Act on its proper construction allowed compensation for non-economic damage (per Sedley LJ and Evans-Lombe J; Brooke LJ dissenting). The Court of Appeal unanimously held that the award of £10,000 for injury to feelings was not excessive and that the tribunal had given adequate reasons for the award.

9. The principal issues before the House were as follows:

(a) Was para 55 of the opinion of Lord Hoffmann part of the ratio decidendi of the House?

(b) If so, should the House depart from that part of the decision in Johnson v Unisys

(c) If it was only an obiter dictum, does section 123 of the 1996 Act only allow compensation for financial loss or does it also permit compensation for non-pecuniary heads of loss?

The status of Lord Hoffmann's observation

10. In submitting that Lord Hoffmann's observation in para 55 of his opinion in Johnson v Unisys was part of the ratio decidendi of that case counsel for the employee had the advantage of a detailed and carefully reasoned judgment by Sedley LJ in the Court of Appeal in his favour. It is necessary to examine this view critically. I am willing to accept that one may be able to infer that, in expressing general agreement with Lord Hoffmann's opinion, Lord Bingham and Lord Millett accepted Lord Hoffmann's comment. During oral argument on the present appeal Lord Nicholls, who gave a separate opinion in Johnson v Unisys which made no reference to Lord Hoffmann's opinion, observed that at the time he saw nothing wrong in Lord Hoffmann's comment. I was the dissenting member of the House. I made no reference to the point because at the time I too saw nothing wrong in the comment. If I had realised that the observation was of doubtful validity, it would have fitted into my line of reasoning to point this out.

11. On the other hand, the correctness of the Norton Tool decision was not an issue in Johnson v Unisys. It is true that there were references by both sides in the oral argument to Norton Tool: 523A-B (counsel for the employee); 524C (counsel for the employer); 524C (counsel for the employee). But the House heard no adversarial argument exploring the correctness or otherwise of that decision. In these circumstances a definitive overruling of a decision which had stood for nearly 30 years would have been a little surprising.

12. It can readily be accepted that Lord Hoffmann's observation in para 55 was relevant to his reasoning that the development of a general common law remedy as contended for by the employee would have involved a complete or virtually complete overlap with the statutory scheme. It tended to support his reasoning. But that does not mean that it was part of the ratio decidendi. Lord Hoffmann's language clearly excludes such a view. He described it as "a doubtful question." He described it as "academic." Then he introduced his comments by the words "But perhaps I may be allowed a comment all the same." This is not the language of a Law Lord inviting the House to overrule a longstanding decision on a point of statutory construction that was not in issue and not explored in opposing arguments.

13. It is unnecessary to struggle any further with the point. The observation of Lord Hoffmann was an obiter dictum. It presents no obstacle to the House now considering the matter in depth.

The interpretation of section 123

14. While in no way determinative of the point of construction before the House, the way in which Norton Tool has been acted on since it was decided in 1972 is of some relevance. In practice it has been consistently applied at all levels. The president of the EAT summarised the position in his judgment in the present case:

"9. Prior to Johnson [2001] ICR 480, all claims and determinations in the employment tribunals (and consequently on appeal from such tribunals in the appeal tribunal and higher appellate courts) have related to recovery for unfair dismissal only of economic loss and not of non-economic loss (or what might in the ordinary common law courts be referred to as 'general damages'). Although in his judgment in McCabe v Cornwall County Council [2003] ICR 501, 512, para 23, a post-Johnson decision of the Court of Appeal, Auld LJ seems to have been under the apprehension that there had been decisions of employment tribunals awarding non-economic loss prior to Johnson, it is common ground between the very experienced teams on both sides before me, a view shared by this tribunal, that such was not the case, and none have been produced. The decision which has been regarded as determinative, and to which express reference was made in the speech of Lord Hoffmann in the House of Lords in Johnson [2001] ICR 480, 500, para 55, as having 'laid down that only financial loss could be compensated', is that of the National Industrial Relations Court, presided over by Sir John Donaldson (President), in Norton Tool Co Ltd v Tewson [1972] ICR 501. . . .

10. Norton Tool has been regularly and universally followed since. This was not simply by the National Industrial Relations Court before its demise in 1974 (e.g. Wellman Alloys Ltd v Russell [1973] ICR 616 and Robert Normansell (Birmingham) Ltd v Barfield (1973) 8 ITR 171 (where 'loss of job satisfaction' was ruled out) per Sir John Donaldson, and Vaughan v Weighpack Ltd [1974] ICR 261 per Sir Hugh Griffiths) but by employment tribunals in England and Wales and Scotland, and in the appeal tribunal, ever since: as recently as 15 May 2001 in the Court of Appeal (some seven weeks after the House of Lords had delivered judgment in Johnson but before it was reported in the law reports, and no reference is made to it) Potter LJ, giving the judgment of the court in O'Donoghue v Redcar and Cleveland Borough Council [2001] IRLR 615, 626, para 71, said:

"Compensation for unfair dismissal is provided for in Chapter II of the Employment Rights Act 1996. Section 112 provides that compensation should be calculated according to sections 118-127A. There is no compensation for injury to feelings or the manner of dismissal, unless that gives rise to financial loss: see Norton Tool Co Ltd v Tewson [1972] ICR 501."

The House of Lords cited Norton Tool for the proposition, by reference to it and to section 123 of the 1996 Act, that financial loss can be recoverable resulting from damage to reputation in respect of unfair dismissal, without disapproval, in Mahmud v Bank of Credit and Commerce International SA [1998] ICR 606, 615, and 628."

The accuracy of this account of the law in action was not disputed before the House.

15. With the solitary exception of a critical note in 1991 on Norton Tool by Professor Hugh Collins (The Just and Equitable CompensatoryAward, (1991) 20 ILJ 201) I am not aware of any academic criticism of this decision. A contemporary case note described the decision in Norton Tool that loss does not include injury to pride or feelings as eminently sensible: Bruce Reynolds, Compensation for unfair dismissal, 1973, 36 MLR 424. In the seventies and eighties text books cited Norton Tool as stating the law: Rideout, Principles of Labour Law, 1976, 2nd ed, pp 141-147; Anderman, The Law of Unfair Dismissal, 1978, pp 212, 217, 221, 222; Hepple & O'Higgins, Employment Law, 1979, 3rd ed, p 608; Mead, Unfair Dismissal Handbook, 1983, 2nd ed, pp 307-311, 317. Except for the note of Professor Hugh Collins the argument that there was a need to depart from Norton Tool was not put forward.

"In a democratic constitution, it is the elected Parliament which must enact new laws; whether or not all the members of the legislature have the least idea of the contents of clauses of Bills, the least unsuccessful way of securing that the will of elected legislators will prevail will be to take the words enacted by them at their face value and so far as possible apply them in accordance with their plain meaning. In so far as Governments effectively control the business of Parliament, they are then at least put to the necessity of making exactly explicit the policies for which they solicit Parliamentary approval in legislation. And the ordinary citizen will be able to take statutes at their face value."

As he explains elsewhere Professor MacCormick had in mind a plain meaning of words read in their contextual setting. A statute does not always yield such a plain meaning. Sometimes arguments of principle must be considered and a balance of consequential arguments must be struck. But in the present case the citation is in point. Read in context the word "loss" has a plain meaning which excludes non-economic loss. It does not cover injury to feelings. It is to be contrasted with section 66(4) of the Sex Discrimination Act 1975, section 57(4) of the Race Relations Act 1976 and section 8(4) of the Disability Discrimination Act 1995 which all expressly provide for compensation for injury to feelings.

17. It can readily be accepted that the words "loss" in varying contexts may have wider and narrower meanings. But that proposition is of no legal interest. The question before the House is the meaning of the word "loss" in section 116(1) of the 1971 statute. If properly construed it was restricted to economic loss, the re-enactment of the statutory formula in 1996 must bear the same meaning. It is not a case in which the ambulatory consequences of the always speaking canon of construction has any role to play. Nothing that happened since 1971 could justify giving to the statutory formula a meaning it did not originally bear.

18. In the Court of Appeal only Evans-Lombe J thought that "loss" in section 116 could include non-economic loss: para 63. I am not persuaded by his reasoning. I agree with the statement of Brooke LJ that it is inconceivable that in this particular context Parliament intended the word to mean anything other than financial loss: para 93. It is noteworthy that Sedley LJ accepted that the "more natural meaning [of the word "loss"] in section 123 is pecuniary loss": para 34. He then proceeded to conclude that tribunals may award compensation for non-economic damage on the different basis that "in section 123(1) loss is not the defining category but a subset of the larger category of just and equitable compensation": para 32-33.

19. Counsel for the employer made a telling point about the consequence of adopting the reasoning of Evans-Lombe J on the meaning of the word "loss" in section 123. He asked: What in the language of section 123(1) would then rule out an award of aggravated or exemplary compensation by way of penalisation of the conduct of the employer? The answer is that only if the word "loss" in section 123(1) is restricted to financial loss are such awards ruled out on the face of the legislation. And nobody could seriously suggest that Parliament intended to allow such awards.

20. Sir John Donaldson in Norton Tool observed that the natural meaning of "loss" in section 116(1) does not include injury to feelings. He added that this view is reinforced by the elaboration in section 116(2) of the 1971 Act, now section 123(2) of the 1996 Act. It is significant that in sections 116(2) and 123(2), and indeed in the remainder of sections 116 and 123, there is no reference to non-economic loss.

21. It may be of some assistance to imagine a parliamentary draftsman, faced in 1971 with a departmental brief to prepare a bill which would make provision for compensation for financial loss as well as for a solatium for injury to feelings. Such instructions could have been given pursuant to the recommendation in 1968 of the Royal Commission that the remedy for unfair dismissal should include compensation for "injured feelings and reputation": Cmnd 3623, para 553. Is it conceivable that a parliamentary draftsman would have provided for the two radically different remedies by the rolled-up wording of section 116(1)? Intuitively, I regard it as implausible that if such a policy decision had been made the technique of providing simply for compensation for "loss" would have been adopted.